BOJ will end YCC in 2023 but tweak this week unlikely, economists say: Reuters Poll

By Kantaro Komiya and Eimi Yamamitsu

(Reuters) – The Bank of Japan will end its long-term yield control policy this year, the majority of economists said in a Reuters poll, anticipating academic Kazuo Ueda’s new leadership to dismantle the complex easing scheme and restore bond market functionality.

The demise of yield curve control (YCC) has been the market’s focus for the Japanese central bank after its originator, the incumbent governor Haruhiko Kuroda, ends his second five-year term on April 8.

Although all but one forecast no surprise at Kuroda’s last rate-review this week, half of economists in the survey said Ueda will carry out additional tweaks within three months, if not a total abandonment, to the YCC such as widening a 10-year yield cap range from 0.5%.

Fourteen of 26 respondents to a question about the YCC expected the BOJ to terminate it this year, the Feb. 28-March 6 poll showed. Eight of them voted for April-June, four for July-September and two for October-December.

“Ueda has argued long-term yield control is a scheme that does not support fine-tuning,” said Hiroshi Namioka, chief strategist and fund manager at T&D Asset Management, who expects Ueda to scrap YCC at his first policy meeting in late April. “A drastic change is plausible.”

Four respondents said the end of the YCC will happen next year and another eight projected it in 2025 or later. None selected the option “BOJ will not end YCC”.

In a separate question asking about what the BOJ would do if it were to tweak the YCC before ending it, 14 of 23 analysts chose widening of its yield fluctuation range again after doubling it to 0.5% in December. The remaining nine economists expected targeting a shorter-term yield.

Japan’s 10-year government bond yield has breached BOJ’s 0.5% ceiling a number of times even after the December tweak, as investors suspect the sustainability of YCC.

“While either means are possible, widening of the range would be more natural if the BOJ were to attribute the tweak to improvement of market functionality,” said Masamichi Adachi, a UBS chief economist.

Half of 24 respondents expected the additional YCC tweak in April-June. Seven anticipated it in the latter half of 2023, while three saw it in the first half of 2024.

Kuroda’s last surprise?

Governor Kuroda is unlikely to jolt the market at his final BOJ policy meeting on March 9-10, according to 96% of 28 respondents to a question, saying the nominated next chief Ueda is better positioned to carry out any review or revamp of Kuroda-era monetary easing.

Only one economist expected a surprise move this week. “Waiting until the April meeting to end the YCC risks another large speculative attack on the yield ceiling which would force the BOJ to buy more JGBs and worsen bond market functioning further,” said Darren Tay at Capital Economics.

Sources familiar with the BOJ’s thinking have told Reuters the central bank is unlikely to make major changes to the YCC given uncertainty over whether wages would rise enough to keep inflation sustainably around its 2% target.

Another poll question allowing multiple answers showed 17 of 27 respondents said an inflation outlook for next fiscal year and beyond surpassing 2% will urge the BOJ to normalise its massive easing.

Thirteen economists selected a positive turn in Japan’s output gap as a trigger for normalisation. Eleven chose wages outstripping consumer inflation and seven pointed out clearer side-effects of the BOJ policy seen in the bond market.

Analysts’ projections for Japan’s economic growth and consumer inflation were mostly unchanged from a February poll, according to the median estimates of around 30 respondents.

(Click here for other stories from the Reuters global economic poll)

(Reporting by Kantaro Komiya and Eimi Yamamitsu; Polling by Vijayalakshmi Srinivasan and Veronica Khongwir; Editing by Sam Holmes)